My wife and I, hardly rich, apparently now make too much to contribute to Roth IRAs. We are both covered by a retirement plan at our workplace that offers the standard fare of Fidelity and Vanguard mutual funds.

Therefore, unless I am missing something, (?) we are also ineligible for contributing to a traditional IRA on a pre-tax basis. That sucks.

We do seem to be eligible to invest in a trad IRA on a non-deduction basis... Why would I do that? It surely makes things complicated in a hurry ($X was put in before taxation; $Y has been taxed). It adds a bunch of restrictions (must draw down at age 70 1/2, etc.) with what advantage? I don't see any. What is the difference between putting that money in a trad IRA and putting it in a personal account?

The advantage of the traditional non-deductible IRA is that your money is allowed to grow tax free until distribution in retirement. That means you are not stuck paying taxes on interest and dividends or capital gains on trades. So you can trade stocks or investments at will without worrying about the tax consequences.

Many believe that a taxable account where you invest in the long term buy and hold style is preferable because if you do it right you are taxed at capital gains rates and then only when you sell. Plus you have easy access to the money if other needs or opportunities come up.

However, many find that finding investments you can truely hold long term is a problem. Imagine the difficulty of those who hesitated to sell and take profits during a market crash to avoid the tax bill. So they waited and lost all their profits.

I think you will decide the IRA is worth it anyway. But you will want to max your pretax 401K plan contributions first. After tax 401K and non-ductible IRA are similar in advantage, but self directed IRA account at a discount broker gives you more investment choices. The smallish contribution limit on IRAs makes them kind of a yawner for many. Its tough to accumulate significant amounts in an IRA. The higher limits of the 401K make them more of a contributor to retirement, and then to rollover IRAs and Roth conversions.

An alternative to the non-deductible traditional IRA might be a Roth IRA. It has a higher income restriction before your contributions are limited.

Another option - available this year and next unless (until) Congress make a change. Make the non-deductible IRA and then do an immediate conversion to a Roth. This works best if you don't have any other IRA accounts. It essentially gets around the income limit for Roth contributions.

Another option - available this year and next unless (until) Congress make a change. Make the non-deductible IRA and then do an immediate conversion to a Roth. This works best if you don't have any other IRA accounts. It essentially gets around the income limit for Roth contributions.------------------This is exactly what I have been doing for the past 3 years due to income limits. (I guess it means I'm making too much money - that's a bad thing?). Since all my funds beside the NDIRA were in Roth's I had no issues other than the limits. 2 weeks ago I converted all my NDIRA to my ROTH accounts and have continued my EFT funding of my NDIRA. As I go down the road I will occasionally convert my NDIRA into my ROTH accounts until dear Uncle Sam decides I can't anymore.

It's a dance, but it is the only way to fund the Roth's at the moment.

Another option - available this year and next unless (until) Congress make a change. Make the non-deductible IRA and then do an immediate conversion to a Roth. This works best if you don't have any other IRA accounts. It essentially gets around the income limit for Roth contributions.------------------This is exactly what I have been doing for the past 3 years due to income limits. (I guess it means I'm making too much money - that's a bad thing?). Since all my funds beside the NDIRA were in Roth's I had no issues other than the limits. 2 weeks ago I converted all my NDIRA to my ROTH accounts and have continued my EFT funding of my NDIRA. As I go down the road I will occasionally convert my NDIRA into my ROTH accounts until dear Uncle Sam decides I can't anymore.

It's a dance, but it is the only way to fund the Roth's at the moment.

MZ4

Does this mean that I could make both the 2009 and 2010 contribution to the Trad IRA and convert the account with both contributions now (before 4/15/10)? Is there a deadline for the conversion? Any reason why NOT to do that?

Does this mean that I could make both the 2009 and 2010 contribution to the Trad IRA and convert the account with both contributions now (before 4/15/10)? Is there a deadline for the conversion? Any reason why NOT to do that?

If you don't have any Traditional IRAs (including rollover IRAs) that have pre-tax money in them, yes - you can convert 100% of the non-deductible contributions however quickly your custodian will let you.

If you have Traditional IRAs that have pre-tax money (contributions or gains) in them, then all conversions must be pro-rated.

For instance, if your entire IRA portfolio consists of $90k pre-tax in a Traditional IRA from a rollover and this $10k in non-deductible contributions, and you converted $10k - $9k of the conversion would be considered to be pre-tax, and you would pay taxes on it. $1k would be considered to be the non-deductible basis, and would not be taxed.

I was reading the 8606 the other day but got lost on the "add line x and y, enter that number here, subtract this, enter this now..." I guess I have to plug in actual numbers.

You said: If you have Traditional IRAs that have pre-tax money (contributions or gains) in them, then all conversions must be pro-rated.

I need to understand pro-rating since my spouse's IRA has pre-tax money. The intent is to convert the whole account, not just a portion. The problem, in my mind, is how do I deal with it next year? If I make the 2010 contribution now and convert before filling, do I report the value of the account (line 6) as $0 next year? Will that complicate things?

I was reading the 8606 the other day but got lost on the "add line x and y, enter that number here, subtract this, enter this now..." I guess I have to plug in actual numbers.

That sometimes helps me.

I need to understand pro-rating since my spouse's IRA has pre-tax money. The intent is to convert the whole account, not just a portion.

If you're converting the whole amount in your spouse's acount, then pro-rating isn't really an issue. You will get the value of the account as of the conversion, and subtract the non-deductible contribution amount (aka 'basis') from that. The remaining amount is what will be taxed. It's only if you're doing partial conversions when you need to deal with pro-rating.

If I make the 2010 contribution now and convert before filling, do I report the value of the account (line 6) as $0 next year?

If you convert all Traditional IRAs before the end of 2010, then yes, the amount on line 6 for the 8086 that is filed with your 2010 tax return will be $0.

Will that complicate things?

It shouldn't. All it will mean is that you've done a total conversion.